By Ben Levisohn

In a report released yesterday, KBW analysts Robert Farnam and Neil Cybart look at Tower Group’s options:

After such a significant reserve charge (24% of net reserves and well over management’s initial $60-110 million range), we view Tower’s options going forward as limited. Many of the capital raising initiatives floated by the press in recent days were geared towards avoiding an A.M. Best rating downgrade, which we now view as difficult to avoid. [Editor: AM Best cut its rating yesterday] We see two likely scenarios going forward, both of which have a large amount of uncertainty: 1) continuing as a going concern with a revised business plan, or 2) going into run-off/selling renewal rights. We caution though that in both scenarios, whatever value that is left for shareholders is dependent on the outcome of class action lawsuits and future reserve development.

As a result, Farnam and Cybart lowered their price target to $7.50 from $21 and “recommend investors stay on the sidelines.”

Tower Group has dropped 12% to $3.88 today at 11:39 a.m., while Stewart Information Services (STC) has dipped 0.1% to $31.16, the Navigators Group (NAVG) has fallen 1.4% to $54.78 and HCI Group (HCI) has gained 1% to $38.16.

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There are 4 comments

OCTOBER 9, 2013 12:21 P.M.

Cap'n Crunch wrote:

AM Best downgraded them yesterday... so they are in de facto run-off now, as most of their customers would require A- or better paper.

OCTOBER 9, 2013 12:26 P.M.

Ben Levisohn wrote:

Thanks Cap'n Crunch. I've updated the post.

OCTOBER 9, 2013 2:16 P.M.

PA Insurance Guy wrote:

I work for a competing carrier to Tower and this stinks to watch this happen. I have broker partners who are going to be feeling the pain of what will probably happen. Tower would beat us in pricing many times when coming up against them. Now, for agents/insureds to find replacement and not get nicked by pricing increases by new carriers or not being able to find new homes for the business, that's tough. I also feel bad for the rank and file of Tower.

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Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.